Shares of Do Naught common stock are currently selling for $46.90. The last dividend paid was $2.21 per share and the market rate of return is 15.8%. At what rate is the dividend growing?

Question

Quizplus · Accepted Answer

The dividend growth rate can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model for a growing dividend), which is represented by the formula P = D0 * (1 + g) / (r - g), where P is the current stock price, D0 is the last dividend paid, r is the required rate of return (market rate of return in this case), and g is the growth rate of the dividend. Rearranging the formula to solve for g gives us g = (P * (r - g) / D0) - 1. Plugging in the values: P = $46.90, D0 = $2.21, and r = 15.8% or 0.158, we can solve for g. The correct calculation leads to a growth rate of approximately 10.59%, which matches option C.

Shares of Do Naught Common Stock Are Currently Selling for $46.90